Last week had all the feeling of a week where most people have already gone on their summer holidays with little sense of any purpose, or direction.
European markets spent the week chopping around in a tight range, albeit with a slightly negative bias, while US markets continued to defy gravity, as well as rising yields to close the week broadly higher, led by the Russell 2000 which has managed to play catchup in the last couple of weeks.
This week might provide the catalyst for a change given last week’s surprise rate hikes from the Reserve Bank of Australian and the Bank of Canada when the majority consensus had been for a hold from both.
Last week’s rate hikes have also shifted the narrative about the longevity of the current level of interest rates with markets now only realising that rate cuts aren’t coming this year and may well have to wait until well into next year.
Sticky core inflation is proving to be a rather intractable problem for central banks, and last week’s hikes have got people thinking that a Fed “pause” this week may not be the slam dunk they think it is.
With the European Central Bank all but certain to go with another 25bps this week, likely to be followed next week by the Swiss National Bank and the Bank of England, the Federal Reserve could well turn out to be an outlier.
Just before Fed policymakers went into their blackout period there were some heavy hints about a skip or pause in June with the potential for another hike in July.
A lot has changed since then with OPEC+ announcing another production cut, and the prospect of higher agricultural commodity prices in the coming months as a result of the Russian sabotage of the Ukrainian dam, which flooded hundreds of acres of farmland.
With inflation still well over double the target rate for all central banks can the US Federal Reserve really afford the luxury of a pause, or are they right to be careful given the deflation coming out of China.
Growth is already slowing in China post covid, and in Europe, Germany and the EU are already in a technical recession, while the UK probably isn’t too far behind, with oil and gas demand also slowing.
This week’s central bank decisions could go a long way in determining how much further central banks are prepared to go before they can offer any insight into when they expect to stop raising rates.
If the markets don’t like what they hear, we could see a sharp move lower.
EUR/USD – made a marginal new high for the month last week at 1.0786 and has since slipped back. We need to take out the 1.0820/30 area to kick on higher. We still have support back at the recent lows at 1.0635.
GBP/USD – still looks well supported, pushing up to the 1 290 area and looks set to test trend line resistance from the 2021 highs currently at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area. We have support at 1.2450.
EUR/GBP – slipped below the December 2022 lows last week to hit a 10-month low with the next key support down near the 0.8350 area and July 2022 lows. Resistance at last week’s highs at 0.8630/40.
USD/JPY – continues to feel a little toppy above the 140.00 area, but needs a break below 138.30 to suggest a return to the 137.00 area. The main resistance remains at 140.95 area.
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